Who Stole Our 3% Economy?

 

Given Wall Street whispers of a very European 1-handle for second-quarter GDP growth, the Trump White House might well have been pleased with the (preliminary) 2.1% number. Although the economy slowed from Q1’s 3.1% pace, it was “a better-than-anticipated outcome,” according to JPMorgan. Thanks, American consumer! And thanks to American taxpayer, too, since solid government spending also helped.

But no thanks to American business, whose capital spending contracted by 0.6%. Another sign, perhaps, that the Trump trade war is offsetting the Trump tax cuts. (At least that’s JPMorgan’s theory.) While it’s good that the record-long economic expansion continues to roll in year ten, one led by consumer/government spending rather than business investment is not the boom you’re looking for.

And maybe “boomlet” rather than “boom.” Turns out that 2018 economic growth didn’t hit the Trump administration’s 2018 target of 3% or better after all, according to revised government data. Measured from the fourth quarter of 2018 to a year earlier, GDP growth came in at 2.5%. Even an alternate measure ⁠— total output for 2018 vs. total output for 2017 ⁠— shows growth fell just a bit short, increasing 2.9%. Yet as The Wall Street Journal points out, that figure “marks the strongest yearly pace of growth since 2015.”

Now, as I’ve repeatedly pointed out, 3% is an ambitious growth target ⁠— much less 4% or 5% ⁠— given demographics and chronically weak productivity growth. The business tax cuts were supposed to help the latter by boosting business investment. But obviously that theory didn’t really play out in Q2, and a reasonable interpretation of that data over the past year and a half would be that the promised investment surge is mildly disappointing — at least so far.

Again from JPM: “Bigger picture, the economy looks like it’s slowing from the fiscal-stimulus supported pace recorded last year, though that slowdown is not happening in an overly abrupt or worrisome manner.” Along the same lines, Goldman Sachs is currently looking for Q3 growth of 1.7%.

Who stole the 3% economy? Certainly the president has his own theory, as outlined on Twitter: “Q2 GDP Up 2.1% Not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck. Almost no inflation. USA is set to Zoom!” But there are other opinions, such as this one from Capital Economics: “Rather than acknowledging that the tax cuts didn’t super-charge growth, we suspect the Trump administration will continue to try and pin the blame on the Fed instead.”

Published in Economics
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  1. Danny Alexander Member
    Danny Alexander
    @DannyAlexander

    The capital investment dip represents not much more than a moment of transition, as major US corporations figure out what operations to withdraw from China and concomitantly what target countries (US included) to shift those operations to.

    Here in Tokyo, I have friends in the enterprise software industry focused on things like MES/Manufacturing Execution Systems, and they’ve reported to me that their sales cycles are currently stretched out longer/later than they’ve previously been accustomed to.

    Why so?  The senior executives at their prospective customers (Japanese manufacturers) are totally preoccupied with figuring out what operations to withdraw from China and concomitantly what target countries (mostly SE Asian nations such as Vietnam, but also in certain cases the US) to shift those operations to.

    Funny that…

    • #1
  2. Bryan G. Stephens Thatcher
    Bryan G. Stephens
    @BryanGStephens

    Danny Alexander (View Comment):

    The capital investment dip represents not much more than a moment of transition, as major US corporations figure out what operations to withdraw from China and concomitantly what target countries (US included) to shift those operations to.

    Here in Tokyo, I have friends in the enterprise software industry focused on things like MES/Manufacturing Execution Systems, and they’ve reported to me that their sales cycles are currently stretched out longer/later than they’ve previously been accustomed to.

    Why so? The senior executives at their prospective customers (Japanese manufacturers) are totally preoccupied with figuring out what operations to withdraw from China and concomitantly what target countries (mostly SE Asian nations such as Vietnam, but also in certain cases the US) to shift those operations to.

    Funny that…

    That sounds like it could be a full on post 

    • #2
  3. Mike H Coolidge
    Mike H
    @MikeH

    Trend GDP growth is 1.5%, expect to see things trend down to that over the long term. This is mostly due to the demographics issue mentioned above.

    • #3
  4. Unsk Member
    Unsk
    @Unsk

    Funny, James you failed to mention  that FED reduced the money supply over the last year a whopping $680 billion dollars or the equivalent of over 3% of the economy’s overall annual growth.

    Funny that.

    It’s also funny that you have been reluctant to discuss the disaster of QE during the Obama Administration where the FED pumped into the economy over $3.5 trillion dollars which is the equivalent of pumping into the economy every year of the Obama Administration an equivalent of over 2% of the economy. While there isn’t a straightline translation between FED stimulus in dollars in economic growth, generally there is a strong relationship until it is abused like it was under Helo Ben and his stimulus began to loose it’s power.

    But you did manage to post and write rapturously about the exalted ” FED Independence”, where let’s see – the FED massively tightened under a Republican  Reagan, tightened again under Republican Bush I, but then massively eased under the Democrat Clinton, eased in the most massive way under the Democrat Obama, eased then tightened under Bush II, and then massively tightened beyond anything the FED has ever done under Trump. FED Chairman Bernacke also did the equivalent of yelling “fire” in a theatre in in 2008 to swing the election to Obama. That is not a record of “FED independence”. It is a record of FED partisanship in favor of the Democrats that unfortunately has been duplicated throughout most of the Federal bureaucracy as we have seen in the criminal Mueller Hoax .

    One also might want to inform your readers that the last and only time the FED  reduced the money supply in a similar fashion to now was 1931, and remember that funny thing that happened as a result- oh ya that thing – I think they called it the “Great Depression”.

    Now because of the disaster Bernacke left there may be very good reasons to reduce the money supply now to mop up excess FED reserves, but clearly the elephant in the room as to what stole the 3% growth is FED behavior, and the fact by the consensus of most economists it has waited too long to lower interest rates.

    It is also miraculous that under Trump with the FED reducing the money supply as it has that the economy even grew at all – a glowing testament to Trump economic policies.

    • #4
  5. cdor Member
    cdor
    @cdor

    Good points, @Unsk. None of this is the OP’s fault, of course. I am no economist, but interest rates are still historically low, at least going back a half dozen decades or so. Cheap money yields a wild ride at the park. In the meantime, the steady as you go saver gets no reward at the redemption window. Finding that perfect equilibrium is the Feds task. Ain’t always easy. Thankfully, for a variety of reasons, often different each quarter, we are still going well. USMCA is just waiting for a treacherous Congress to approve. That’s a solid plus on the ledger. The Japanese agreement may already have been inked, though not yet announced. England hopefully, with its new leader, will get Brexit accomplished, opening more trade possibilities between England and the USA. Finally China will continue being a smaller factor in the overall scheme for the United States and considering the outspoken animosity from China, its a good thing.

    • #5
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